The regulatory capture argument someone made below is hard to square with the history: http://www.americanbar.org/publications/franchise_lawyer/201.... At first, cars were sold directly to consumers by manufacturers, and independent dealerships were rare. It's really hard to explain using a regulatory capture or lobbying model how car manufacturers, huge incredibly profitable companies at the time, lost their bid to preserve the status quo.
In reality, these were consumer and economic protection laws. States didn't like how much money was flowing from their economies to Detroit, and by making direct consumer sales illegal they gave a lot of leverage to franchises, which are local businesses. They also justified the laws on consumer protection grounds--local car dealers would be a lot more responsive to customers than a megacorp in Detroit.
As for the "planned economy" aspect--remember that the ideas of what constituted unreasonable interference in the economy were very different back then. The revolution of applying economics principles to government didn't really happen until the 1960's and 1970's. Before that, quite extensive interventions in the economy were routine. For example, prior to the 1970's, the Civil Aeronautics Board set airline ticket prices! That would be amazingly controversial in the U.S. today, on either side of the aisle, but was par for course back in the day.
Sure, they didn't originate with regulatory capture.
But the actions to prevent Tesla from selling direct now, today, have definitely been the result of regulatory capture.
The original interventions created a kind of local businessman, who knew he owed his existence to these local regulations.
And now that these laws have been made unnecessary due to the availability of both information and exposure -- and incontrovertibly unnecessary in the case of for instance a large city or densely populated state, where healthy competition exists -- the reason that they hang on and prevent companies from Tesla from opening shop is absolutely regulatory capture.
There doesn't seem to be much disagreement about the facts, just the definition of "regulatory capture".
The idea which "regulatory capture" describes is when regulations fail to do what they are intended to do, when instead of restricting they empower.
But the regulations have not "failed", they are still restricting manufacturers and empowering dealers, so this isn't "regulatory capture", just bog-standard monopoly-granting.
No, that's not the normal definition. Wikipedia, for example:
> Regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or special concerns of interest groups that dominate the industry or sector it is charged with regulating
Enforcing barriers to entry is a huge aspect of regulatory capture. A regulation that creates $1 million/year of compliance costs nominally "restricts" all players (and certainly doesn't "empower" them), but that money is often a pittance for large companies while effectively squashing new entrants, greatly to the large companies' benefit.
I don't think the possibility that the original laws were motivated by good intentions conflicts whatsoever with the hypothesis of regulatory capture today. Industries have been using outdated laws to build barriers to entry since time immemorial.
> States didn't like how much money was flowing from their economies to Detroit, and by making direct consumer sales illegal they gave a lot of leverage to franchises, which are local businesses.
That seems to make sense. What's different about Palo Alto, CA that they're ok with money flowing directly there? Is it because dealerships have become unnecessary middlemen putting more $ on the cost before it reaches consumer hands?
Palo Alto isn't different.[1] Getting rid of these laws will cost NJ jobs, while making products slightly cheaper for everyone else. In a state like NJ, that's a tough pill to swallow no matter what.
[1] In fact, I imagine lots of state legislators hate Palo Alto for making middle class jobs in their states obsolete while creating a few high paying jobs in California and diverting the difference to shareholders in New York. We're talking about a state hollowed out by deindustrialization, where the promise of better jobs to replace the ones lost was made decades ago, and still has yet to materialize.
I don't know if you are advocating for a zero sum view of the economy, but you are definitely describing one. The thing about those middle class jobs that New Jersey is losing, is that they didn't need to exist. The only way they did was by stealing through coercion a little bit from people who chose to buy cars in New Jersey (mostly state residents).
I'm not describing a zero-sum economy. It's possible that NJ suffers a net local loss, even if that's more than outweighed by a net benefit in NJ + CA. And even if NJ enjoys a net local benefit, you still have a bunch of people out of work in return for everyone paying slightly lower prices for cars. In a place like NJ, where unemployment is the #1, #2, and #3 concern, you can see why legislators would be gun-shy about getting rid of local protections in the name of economic idealism.
The standard arguments for free trade apply as much to individual states as to countries. Just as the US enjoys a net benefit from buying goods from China instead of making them, so does New Jersey enjoy a net gain from its residents buying California cars without any New Jersey middleman.
I'd probably suggest that if a direct-from-manufacturer store would open in NJ the people most likely to be able to find employment at such an establishment would be those who used to work at a dealership.
It's not just states that hate Palo Alto. Foreign governments the world over are chafing at the amounts of revenue that pour into Google and Apple and they don't get even the tiniest cut.
A large economy will have consumers spending millions on google ads and iTunes content, and none of it will end up in the tax coffers of the local country.
This is better off for everyone except for the politicians who want to throw money around.
The eventual result will be make-work schemes like the local dealer franchises. Expect enforced-local entities in some countries where an office is created and people do meaningless work so the tax revenues can be domiciled. In other words, the exact same model as the car dealerships.
It's bad but people hate being exposed to the market, because it systematically punishes laziness. Most people will vote for a politician to make it easier for them to be lazy, even if it ultimately makes them worse off.
In reference to local car dealers part.
So states were mainly only interested in the money, but then justified it under the guise of consumer protections.
Is that fair to say ?
Or did states really care about consumer protections ?
And in the pursuit of truthiness, and not creating a false dichotomy, are both those wrong ?
To get legislation like this passed, you build a coalition. So the consumer protection angle isn't just a guise so much as it is an angle to get the support of consumer-minded legislators.
As for whether these justifications are wrong--it's hard to say. From a jobs point of view, it's probably still not a win for NJ for those dealerships to shut down and have NJ money flow over the internet directly to California. The consumer protection angle is a lot weaker in a day and age where Tesla can monitor your car's stats over the internet.
Actually, no extra money will flow from NJ to California.
Consumers will pay less for their cars, and the extra $1000-$2000 dealerships make on each car, will remain in the consumer's pocket. This is better on the whole.
Dealerships are market inefficiencies, as they create no real value or "wealth"[1]. They give nothing to consumers in return for the $1-$2k extra that consumers pay for each car.
Eliminating an economic inefficiency (the middle-man) creates a surplus. Where that surplus flows, whether to the consumer or the producer or split between both, depends on the market.
> Dealerships are market inefficiencies, as they create no real value or "wealth"[1].
This is very surprising complaint to hear - the whole capitalist economy is filled with inefficiencies! (and Paul Graham is hardly saying something novel here).
The GP wasn't saying that all middlemen add inefficiencies or destroy value, only that these particular ones do since you're forced to use them regardless of need.
Basically, franchises arose because auto [Edit: manufacturers] didn't originally want to establish a broad set of factory stores. States then generally passed laws over time to keep manufacturers from coming in and competing with the franchisees because they'd have various advantages in doing so. (And it probably didn't hurt that the dealers by then were often well-established local businesses.) There's also been something of an anti-trust trend against vertical integration though that's really at the federal level so may not apply here (e.g. studios not owning theaters).
Right, these laws made sense 50-60 years ago, but now all the dealerships are established and Tesla as a new unproven company that has a comparative low volume of sales can't simply get dealerships to sell their cars plus it may violate agreements with competing car companies that they also sale. In this case there is no established Tesla franchises that would lose, and Tesla can't simply just get dealers to start selling their cars . So basically these laws now serve little purpose except protecting dealers/manufacturers that sell combustion engines from new competition.
It would probably make sense to rewrite the laws to somehow say that car manufacturers can't compete with existing dealer franchises within a certain mile/population radius and can't revoke dealer franchises simply to open up new territory for themselves.
But to say that no auto manufacturer can operate direct sales is silly since there are now new car companies being formed.
The only thing that makes economic sense is to remove all of these dealership-protection laws from the books and allow the free market to organize itself in the most efficient way possible. If that means that auto manufacturers continue to use dealerships, fine. But that model shouldn't be forced upon any good/service by legislation.
If dealers would all go out if business if they had to compete fairly, then doesn't that suggest they might not be providing customers with much value?
While I do think market interventions are sometimes justified, in this case it seems we are protecting dealers for their own sake.
Oops accidentally upvoted you. As somebody else mentioned above, Best Buy competes just fine with Apple while buying their products. So it's not impossible/unfair.
Also because the franchises weren't sold with an expiration date so for the manufacturers to start selling direct might be some kind of a breach of contract. But it'd take FOREVER to play out in the courts, and made worse by the fact that it's a national thing so you might not be able to consolidate it all down to one case in one federal court. It might be 50 class action suits in 50 states with several different outcomes.
they allowed factories to produce cars the full calendar year which substantially reduced costs and risks. eventually the manufacturers got to the position where they did have the capital and brand identity to compete and those dealers had to be protected.
i never understand why people are so anti-dealership. yes there are stories about bad ones but to be honest just how would anyone expect these places to be in business if they were consistently bad.
long term, without a dealership model if you have a problem with your tesla your likely up the creek unless they agree with you. there have been some well publicized cases where it took getting media involved to get cars bought back or fixed. dealerships want to preserve their customers as many sell more than one brand, manufactures can easily write off one consumer.
I was going to post this, too. rayiner's answer in this thread is also excellent, but this episode of Planet Money gives much more historical background.
The ban was created after Tesla started selling, and now it only lifted the ban for zero emission vehicles as far as I can tell (didn't read the whole bill). If Ford or GM wanted to sell direct, they couldn't.
In the more generic case, states have these laws on the books to protect the local franchise dealers. These people buy cars from a particular manufacturer, usually multiple brands. In order to protect these dealers from the perceived threat that an automaker could come in and sell direct (thus undercutting their business), laws were enacted to require a franchise to sell vehicles. Thus Ford couldn't come in and sell vehicles unless they created their own franchise, which would raise their costs to be on par with the independent franchises. I think the justification for the protection is the local jobs and businesses.
"The ban was created after Tesla started selling, and now it only lifted the ban for zero emission vehicles as far as I can tell (didn't read the whole bill). If Ford or GM wanted to sell direct, they couldn't."
Which is a damn shame. When shopping for a car every manufacturer currently has a 'build your own' tool online where you can build you car to spec and you get a rough estimate. However, in my experience, this estimate is never honored by dealers.
The last car I purchased had an item on the sticker price called 'Dealer improvements' that was $6000, and after talking to the dealer he would "cut me a break and not charge me anything" so I would be getting the car for $6000 less right off the bat. When I inquired as to what exactly did they improve he refused to answer in detail.
I'm sure my experiences are not unique. I would love to just press an Order button at the end of the vehicle builder and have it delivered to my door or somewhere close to my home.
Sounds like you need to go to different dealers. I'm no fan of the dealer experience but I have gotten prices and costs online and certainly never had a dealer try to tack on $6K. Maybe it was some particularly in-demand model. At least one dealer I've bought a car from has been "no haggle"; the price on the sticker was the price.
The problem with getting rid of dealers is that most people will still want somewhere to test drive, someone local to handle paperwork, and there would need to be a service network in any case. Tesla will still have dealers. They'll just be owned by the company. And the experience will doubtless be comparable to existing high-end car dealers.
It's a double edged sword. The manufacturer will be happy if he sell a car. The dealer needs to first buy the car from the manufacturer and then sell it for a profit. Thus the manufacturer have a competetive advantage, that they could use to remove all competition, and then charge whatever the fuck they want.
I just don't think this blanket ban is the way forward, but rather some regulation/comparison about what a store (dealer or manufacture owned) actually pays for cars, so you can clearly see if manufacture owned stores are not getting unfair advantage. I suppose that competition between manufacturs would be the driving force in that case. It's certainly possible.
My own experience was something along the lines of this: Figure out what the car cost on Fords webpage, go to a dealer, get a quote, negotiate a little. Repeat with 2 other dealers and see what you get, and let it be known what offer you have so far (they usually demand some proof, so you better be telling the truth). I ended up paying 15% less than the standard quoted price, which could have been better, but I wanted to buy from a dealer with a great reputation.
> It's a double edged sword. The manufacturer will be happy if he sell a car. The dealer needs to first buy the car from the manufacturer and then sell it for a profit. Thus the manufacturer have a competetive advantage, that they could use to remove all competition, and then charge whatever the fuck they want.
I don't think that's it... having dealerships does nothing to stop the manufacturer from changing prices to whatever they want.
The "build your car" tools on the websites always represent the "as low as" price. It assumes all possible rebates, many of which you aren't eligible for. If you were a military veteran who recently graduated college with great credit and an account at a credit union with a pre-existing arrangement with that dealership, and are also trading in a same-brand car while trying to purchase a model with flagging sales, then tada, you can easily get the "as advertised" price.
>The "build your car" tools on the websites always represent the "as low as" price.
Wrong. The "build your car" tool is generally the MSRP, since it's on the manufacturers site, which will be substantially higher than price you'll have to pay at the dealer.
Car dealerships are also generally small family owned businesses. The kind that plays well in red states as being the heart of the American economy of self made people. They must protected at all costs from competition, ideas, and regulation that could put them out of business.
As far as I know, car dealers tend to be large empires built over the years through roll-ups; and they tend to ally themselves with the party favoring big government.[1]
Oh, it's easy. It's through things like regulatory capture, funding campaigns and thus having direct access to congressional workers, having people appointed to regulatory bodies that are partial to your stance and/or other means of influencing non-elected officials. Basically, if you can't beat them through normal market means, pass laws so they can't beat you.
Sounds cynical but take note, back when cars were first coming out the laws that were passed in response to them were designed to impede the adoption, not promote.
Consider: who would benefit most from the removal of these laws? The obvious answer is the General Motors Corporation. They could own their own dealerships, getting better control of customer experience and a bigger cut of the profits. It's not like they're short on capital such that they would be forced to franchise anyway. As the largest automaker in the world for most of the last century, they would get a significantly outsized benefit compared to any competitor.
Now for a rhetorical question. Who has more political power in the U.S: car dealerships in aggregate or General Motors? Answer: General Motors, of course!
Another rhetorical question: Does Tesla have more political power in New Jersey than GM as well, given that the exception was carved out specifically regarding the type of vehicle they produce?
edit: New Jersey is no stranger to economic protectionism. They actually prohibit self-service auto refueling as a jobs program, which would seem to be more threatened by Tesla than car dealerships. I'm not trying to argue that it doesn't exist, just that it doesn't explain what's going on here.
These are state laws. General Motors had less influence at the state and local level than the auto dealerships did. At that level it's about intimate relationships, those dealership owners directly knew and financed their local politicians and GM did not.
GM was facing a nearly impossible 50 state battle, spanning thousands of politicians, in trying to do anything about the dealership cartels. Instead, GM was ultimately ok with a truce with them so long as GM could control issuing (or revoking) the dealer licenses.
Michigan has auto dealer licensure requirements, which (as far as I can tell, though I am not a lawyer so you shouldn't believe me) are very similar to those in New Jersey. Car dealerships do not have more political influence in Michigan than GM does.
Also, if it were just a political fight between businesse interests, GM could just go over the states' heads: people frequently buy cars across state lines, so the commerce clause reasoning for a law prohibiting these laws wouldn't even be as tortured as it usually is.
I'm baffled that anyone would think that's a great idea. Compelling drivers to pay someone to do something that nearly all drivers have no problem doing themselves seems absurd. Please explain your reasoning.
I wonder if GP is trolling. Having spent time in NJ visiting family, I've researched this issue a bit and have never found any logic to support the ban on self-service pumps – beyond corruption, politics, etc.
The one interesting thing I did find is that many disabled motorists have a very hard time using self-service pumps – while still being able to drive safely with vehicle modifications. The Americans with Disabilities Act even has a requirement that gas stations provide refueling assistance, with some exceptions. (http://www.ada.gov/gasserve.htm)
That still doesn't mean self-service should be banned. At most, it's argument for requiring gas stations to have >=1 full-service pump.
The other funny thing is that many NJ natives seem to really like using full-service pumps and want to keep the ban. And because they have low gas taxes and import so much fuel, NJ still has some of the cheapest gas in the country. So, there's not much political will to change it – despite the inanity.
We are rapidly moving towards making lots and lots of jobs on the low end of the skill spectrum obsolete. (and plenty of medium-to-high skill jobs as well) Non-self-service stations provide a lot of employment opportunities.
Yeah, that argument doesn't work for me. Creating arbitrary, unnecessary inefficiencies in the market does not benefit a society economically in the long-run – and is bad mechanism for wealth redistribution.
Why not ban ATM's to provide bank teller employment? Or ban self-checkout at grocery stores? Let's not forget all of those poor elevator operators out of work.
When I was a kid nearly all fuel stations were "full service." You would pull in, and an attendant would pump the fuel, check oil, clean your windows, air up tires if needed, take payment, and you never had to step out of the car. It was really nice, actually. Now you get to do all that yourself while standing out in the cold or heat, or dealing with an indifferent clerk who adds zero value to the transaction.
Mandating it is absurd. That people would go so far as incarcerate people for pumping their own gas goes way beyond resolving an inconvenience and well into normalizing bureaucratic oppression. (Yes, that sounds overstated - but really, jail time for pumping gas? it's not about the pumping, it's about something being very wrong & dangerous about the mindset that thinks jail time for pumping gas is reasonable.)
In more plain language: car dealers (companies and their workers) lobbied for politicians to ban competition. They give campaign funding, and in exchange they get legislation like this ban.
Everyone hates car dealers now, but at the time the laws were enacted; they made some sense. The problem isn't that we are protecting Ford dealers from Ford (given that the franchisee did have to pay Ford for the franchise). The problem is that Tesla never raised money through franchise arrangements and was/is getting shut out of the market anyway.
I'm no fan of car dealerships but a lot of the hate has to do with the fact that it's such a penny-pinching business (for both consumer and dealer) at most mainstream brand dealers. From what I've heard, if you go into a BMW dealer the experience is usually quite good.
But certainly I don't see why a manufacturer who doesn't have an existing dealer network shouldn't be able to sell in whatever way it chooses.
I've actually found that the car buying experience is not that bad at a dealership, but the service/parts department is not something worth dealing with unless you really have to.
At this point; the dealers know that you know what the invoice price or KBB value of a car is, and what kind of loan rate you can get elsewhere. They might want to sell you a warranty or the like, but at that point you've already negotiated the price of the car, know your loan rate, and can just say no to the extras and move on.
>From what I've heard, if you go into a BMW dealer the experience is usually quite good.
It's not - it's probably better than your average Dodge dealership, but there's nothing inherently different about BMW dealers - they make their money on services and accessories that you don't need like most other dealerships. They'll overcharge you for an oil change (which is typically cheaper, but not much, at an indie mechanic - but it's irrelevant because changing a BMW's oil is so so simple your grandmother can do it) like any other place, but they might offer you some muffins while you wait in the lobby. BMWNA (BMW's North American operations) will keep the dealerships in line if they start watering down the brand value, but you usually have to go through a long and arduous complaint process to get them listening.
High-end car service, even routine service, is certainly pricey. The general storyline I've heard is that you either 1.) Don't care what it costs, 2.) Lease, 3.) Buy with an extended warranty and plan to get rid of it at the end of the warranty, or 4.) Either have an indie mechanic you like or do it yourself.
I don't know the background. Doesn't this same problem exist with any store? I could buy a laptop from BestBuy, or I could go straight to the manufacturer e.g. Dell. I've always been annoyed when I can't just buy things from the manufacturer and have to go through some intermediary.
I'm not sure about "everyone hates dealers", but having never purchased a car, I have no idea why a car store is different from a computer store. What's special about dealerships?
I just don't understand how you can ban selling what you manufacture to whomever you like outside of a planned economy.